22nd Special Session of the United Nations General Assembly (UNGASS) on Small Island Developing States
New York, 27-28 September 1999

Press Kit on Small Islands: Issues and Actions

On Trade and Aid:
Small Islands Face Economic Crunch

Long vulnerable to the forces of the seas, small islands are now bracing themselves against the gathering forces of globalization which threaten to alter dramatically the economies of many islands and hamper efforts to promote sustainable development.

New developments in the push for greater trade liberalization have served notice to small islands that the special trade preferences that allow them to sell their traditional agricultural exports in developed countries at protected prices will soon end. Without these trade preferences, islanders have little hope that their products -- such as coconuts, bananas, sugar and spices -- can compete in global agricultural markets against larger-scale operations in other countries.

Five years after both developing and developed countries agreed on a special plan to assist small islands in pursuing sustainable development at the Conference on Small Island Developing States held in Barbados in 1994, issues of trade and the effects of globalization--while always important-- have taken on a sense of urgency, as countries prepare to review implementation of the Barbados plan at a special session of the United Nations General Assembly this September.

The Trade Squeeze

Recent rulings by the World Trade Organization that some of the islands' trade preferences violate free trade agreements have fueled concern that small island economies will not have sufficient time or resources to reinvent their economies before suffering a sharp economic downturn. Tighter national budgets, it is feared, will inevitably lead to fewer available resources for programmes to protect the environment.

Specks of land in the ocean, small islands are easily swamped in today's world economy. Yet they rely on international trade more than most countries, as their limited land mass and resources require that they import virtually everything, from energy to health supplies to machinery. Total freight costs as a percentage of import value for the small islands were 55 per cent higher than for developed market-economy countries in 1993, and by 1996, the disparity grew to as much as 66 per cent.

This reliance on the outside world drives up the cost of living and doing business for islanders, and makes it extremely difficult for them to compete against lower-cost agricultural producers in other countries. Furthermore, because of climate, soil and sometimes severe weather conditions -- such as hurricanes in the Caribbean, cyclones in the Indian Ocean, and typhoons in the Pacific -- small islands are often limited in the types of crops they can grow.

Small islands have been able to sell their agricultural products in many developed countries for more than the market price as a result of several international agreements, often based on former colonial relationships. These have included the Generalized System of Preferences, which was negotiated under the General Agreement on Tariffs and Trade (GATT), and a number of regional agreements. In particular, under the LomEConvention, a trade and aid pact often cited as a model of north-south cooperation, the European Union agreed to import commodities such as sugar from small islands and other African, Caribbean and Pacific nations at a negotiated price--usually higher than prevailing market rates.

The subsidies from these arrangements have helped sustain many small island economies. In addition to bringing in valuable foreign exchange, these agreements have also provided the islands with guaranteed access to northern markets, which has been important for attracting foreign investment for other ventures. In Mauritius, this guaranteed access to markets has been credited as the determining factor in the establishment of an Export Processing Zone that today provides jobs to more than 80,000 people.

Yet some have argued that the preferences have lulled the islands into a false sense of security that prevented them from either diversifying or from adopting measures to remain competitive in the global marketplace.

Banana Wars

Although the small islands account for a very small portion of the total banana market, the United States and several Latin American countries filed complaints that the EU banana quota system harmed their economic interests by preventing the sale of their bananas in European markets. The WTO ruled that the US had a right to retaliate against the EU in the amount of $190 million for the business that its companies lost as a result of the banana quotas. Lost in the clash between the two economic goliaths, however, is whatever sense of security the small islands might have had. Islanders fear that the rush to trade liberalization will mean that preferences for other agricultural commodities and textile products may soon be threatened as well.

Small islands have strenuously opposed the WTO ruling because, they say, it shows an unwillingness on the part of the world's major multilateral organizations to respect, represent or consider the needs of vulnerable developing states. They contend that the continuation of trade preferences is vital in order to increase national income, job creation, international competitiveness and sustainable development.

For banana-producing islands, particularly in the Caribbean, big changes are imminent. Since bananas can be grown in many countries, the elimination of a protected market will mean that the market will be flooded with more bananas, which will drive prices down. Small island growers will be hurt, since their production and labour costs are higher than elsewhere.

If preserving the trade preferences is not possible, the small islands are asking that some differential treatment or preferences be maintained for a certain period of time, or that a mechanism be created to compensate them in some way for their lost exports until their economies are sufficiently restructured.

Negotiations are currently underway for a successor to the LomEConvention, and new terms of trade between the small island developing States and the developed nations are being discussed. The EU has said that it will make an effort to ensure that the LomEtalks, as well as at the Millennium Round of multilateral trade negotiations under the WTO, will reduce remaining trade barriers and provide the small islands with more secure access to export markets for their products.

Feeling the Pinch

The continued push for trade liberalization, combined with the steady decline in the amount of official development assistance from donor countries, is expected to have a major impact on sustainable development in small island developing States. As national incomes decrease, island governments will find themselves increasingly unable to carry out programmes that protect the environment, and may be pressured to favour short-term growth over long-term resource conservation. Declining incomes may force already struggling islanders to overexploit land, forests and fisheries, with resulting stress on the environment. In Haiti, the poorest country in the western hemisphere, less than one per cent of the country's forests remain.

Antigua and Barbuda has already begun to feel the pinch. As a country where almost 70 per cent of the gross domestic product (GDP) is derived from tourism, it enjoyed a high level of economic growth during the 1980s and early 1990s. But a series of four hurricanes, combined with an influx of 3,000 refugees fleeing a major volcanic eruption in the neighbouring island of Montserrat, contributed to a decline in the island's fortunes. The government was forced to borrow heavily to repair infrastructure damaged by the storms, and social and environmental programmes were put on hold.

A downward economic spiral could reduce an island's attractiveness as a vacation destination. Greater social tensions and a blighted environment are also likely to keep tourists away. In the short term, as a result of the banana dilemma, there are reports of farmers on some Caribbean islands who are turning from banana production to the cultivation of illicit drugs such as marijuana, which are much more profitable. While virtually all small island governments have pledged to crack down on the drug trade, most do not have the resources to sufficiently curb the business.

A lack of opportunities will also spur further migration from the small islands to developed countries. This Abrain drain has long been cited as a major obstacle for the islands in promoting their economic development.

Limited Options

While most small islands accept that they must restructure their economies, this is a long-term process involving building new industries and retraining major segments of the labour force. The choices are difficult, expensive and limited.

The larger and more populous of the small island states have more options, but for the smaller islands, such as Tuvalu and Antigua and Barbuda, there are fewer possibilities. Donor countries have recognized that these islands will continue to require ongoing development cooperation.

Some islands might continue to compete in the global agricultural market if they can distinguish their products--by growing bananas that are tastier or environmentally or organically certified, for example--and attempt to carve out a market niche. There are also proposals to develop exports of Anatural products from the small islands, such as the natural cosmetics made from coconuts which Dominica sells abroad. Some islands, such as the Cayman Islands and Bermuda, have become well known off-shore financial centres, and Jamaica has attempted to market itself as a data servicing centre. But for the most part, the small islands must look to something else.

They are handicapped in this search by a number of factors. Most islands are not endowed with rich natural resources, and the need to import materials and energy makes costs higher than elsewhere. It also raises the general cost of living, which translates into higher wages and labour costs. In addition, although islanders tend to have higher levels of education than are found in other developing countries, their small populations often lack the critical mass of skills necessary to sustain an industry.

While private capital is playing a major role in the current push towards globalization, foreign direct investment in the islands has, for the most part, targeted the tourism sector -- which is no panacea.

The prospects for tourism are good: the World Tourism Organization predicts that globally, there will be a 300 per cent increase in the number of tourists over the next 21 years, to 2021, and that international spending by tourists will increase by 500 per cent over the same period. Regional projections indicate that small islands will substantially benefit from this global growth. Already tourism is one of the largest industries on the small islands, and on many islands, it has surpassed agriculture as the major foreign currency earner. Even though many of the profits Aleak back to overseas investors, local benefits have been considerable.

Yet tourism is a fair-weather industry, and its success is dependent on many fluctuating factors, such as a good world economy, good weather and stable social conditions. Small islands--and foreign investors themselves--are wary of becoming too dependent on tourism, as it is extremely sensitive to environmental degradation and economic shocks. The Asian financial crisis, for example, has caused a significant drop in the number of tourists visiting the Pacific islands. Major hurricanes have had a deadly impact on tourism prospects for some Caribbean islands, and have also prompted insurance rates to skyrocket.

One possible option for small islands might be the exploitation of their exclusive economic zones, or the 200 miles of waters surrounding each island. Most small islands have been unable, so far, to use these zones for economic gain, as the costs of underwater mineral mining are still prohibitive, and the islands have been generally unable to police the fishing activities in their waters. Alternatively, small islands may turn to small and medium-size enterprises in new areas, such as advanced technology, book publishing and some textile trades.

Declining Assistance

Following global trends, official development assistance to small island developing States has continued to fall since 1994, when the Barbados Conference generated a surge of interest. Net disbursements for bilateral and multilateral aid combined have dropped from $2.36 billion in 1994 to $1.96 billion in 1997, the last year for which data is available.

The levels of assistance that have been received by the small islands have been far lower than anticipated, or needed, to implement the 1994 Barbados Programme of Action, which detailed the actions that were necessary to achieve sustainable development in the small islands. Although partnership efforts have lagged in some respects, representatives of donor countries and small islands met in February 1999 to discuss possible avenues for future assistance. Responding to donor demands that the islands prioritize their needs, representatives from small island governments and regional organizations presented over 300 project proposals for assistance to implement the Barbados Programme. Although small islands and donors both saw the meeting as constructive, few commitments have resulted thus far.

Of the small islands, Papua New Guinea received the most bilateral assistance in 1996CUS $350 million, followed by Haiti, the Netherlands Antilles, and the Federated States of Micronesia. On the donor side, Australia provided the most-- US $311 million, which mainly went to Pacific islands-- and was followed by the United States, Japan, the Netherlands, France, Italy and New Zealand.

Given worldwide declines in aid, the small islands are concerned that their needs might be overlooked in the global picture, since the islands generally have a higher GDP per capita than other developing countries. For example, when the Maldives was removed from a UN list of the world's poorest countries last year, it protested that its prospects for aid would be reduced and that it would be deprived of certain benefits that accrue to the poorest countries, such as interest-free loans, debt write-offs and preferential market access. Samoa, Vanuatu and Cape Verde have also been tapped as countries that should graduate from the list.

International financial institutions often rank developing countries' needs by their GDP per capita, which the small islands contend is not an accurate gauge. Instead, they maintain that they should be classified separately according to a Avulnerability index that takes into account their susceptibility to external factors that could cripple an island's economy, such as natural disasters and trade shocks. The index would also take into account that small islands have higher costs than other developing countries, which impairs their international competitiveness.

The Search for Solutions

Limited development options, a lack of resources, and ever-present threats from storms and the sea provide some serious challenges for small island developing States. Increasingly, however, these countries have found that there is strength in numbers, and they have banded together to form regional and global groups, such as the 40-nation Alliance of Small Island States (AOSIS). Small islands in the Pacific and the Caribbean are attempting to create larger regional markets, and the Indian Ocean countries have joined together in an effort to solve environmental problems.

Through cooperation among themselves, the islands have gained a measure of political clout that has been most pronounced in the negotiations on climate change, and they are now attempting to use this cooperation to further their economic strategies. The small island developing States hope that the UN General Assembly five-year review of the Barbados action plan will once again focus global attention on their needs and give new impetus to international efforts to foster their sustainable development.

Published by the United Nations Department of Public Information
DPI/2061 - July 1999 - 5M